Q3 2021 Intel Corp Earnings Call
Thank you for standing by and welcome to the Q3 2021 Intel Corporation earnings Conference. At this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your Touchtone telephone.
Please be advised that today's conference is being recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host Vice President and director of Investor Relations Tony Veilleux. Please go ahead.
Thank you operator, welcome to Intel's third quarter earnings Conference.
Paul.
By now you Should've received a copy of our earnings release and the earnings presentation.
If you've not received both documents they're available on our Investor website I M. P C dot com.
The earnings presentation is also available in the webcast window for those joining us online.
I'm joined today by our CEO, Pat Gelsinger, and our CFO George.
George Davis in.
A moment, we'll hear brief remarks from both followed by Q&A.
Before we begin let me remind everyone that today's discussion contains forward looking statements based on the environment as we currently see it and as such it does include risks and uncertainties.
Please refer to our press release for more information on the specific risk factors that could cause.
Actual results to differ materially.
A brief reminder, that this quarter, we have provided both GAAP and non-GAAP financial measures today, we'll be speaking to the non-GAAP financial measures when describing our consolidated results.
The earnings presentation and earnings release available on <unk> Dot com include the full GAAP and non-GAAP reconciliations with that let.
Let me hand, it over to Pat.
Thank you Tony and good afternoon, everyone Q3 was a solid quarter, where we navigated a challenging supply environment to deliver year over year growth on the topline, while beating expectations on gross margin and EPS. We had record third quarter revenue of D. C. G in mobile Ly, while I O T G.
An all time record as it continued its recovery from Covid slowdowns.
Our focus on execution continued as we delivered on our initial idea M 2.0 commitments, we broke ground on new Fabs shared our accelerated path to regain process performance leadership and made our most dramatic architecture announcements in a decade.
We also announced major customer wins across every part of our business, including in the data center with AWS, and Google, New Evo designs and client and exciting mobilised partnerships with Zika and sixth SC.
The demand for semiconductors remains strong and our factories performed exceptionally well in a highly dynamic environment.
<unk> had were match sets post huge challenges for our customers and overall industry supply remained very constrained.
The resilience of our factory network was on display delivering considerable upsides and reacting to rapid demand shifts reinforcing the unique and strategic value of IBM to point out.
While.
While we are still in the early stages of our journey, we are getting better everyday. It is clear that we have to move even faster even more nimble and invest now to achieve our goals of undisputed leadership down the road I can see the enormous potential that lies ahead and I couldn't be prouder of the Intel team and the progress that we're making.
Again with what we're seeing in the market demand remains strong across all of our segments and I continue to believe that we're just starting a cycle of sustained growth, which we are well positioned to capture the digitization of everything accelerated by the four superpowers of AI pervasive connectivity cloud to edge infrastructure and.
Let me be just compute are driving the sustained need for more semiconductors and the market is expected to double to one trillion dollars by 2030 in that time frame the market for leading edge nodes will rise to be over 50% of the total while the market for leading edge foundry services will grow at twice the rate of the semi.
By industry overall.
We are one of the few companies with both the technical and financial resources to win in a market that is increasingly leading edge and challenged by the extreme physics of rejuvenated and continuing Moore's law.
PC demand remains very strong and we believe the 2021 Tam will grow double digits even.
Even as ecosystem shortages constrain our customers' ability to ship finished systems Dell HP Lenovo along with other Oems and ecosystem partners agree. The Pcs are now a structurally larger and sustainably growing market.
As we head into 2022, we expect the ecosystem supply situations.
Asian to gradually improve in the PC market will continue to grow as tailwind from when 11 hybrid work models, a larger installed base and compelling new platforms drive PC density shorter replacement cycles and penetration of new markets.
Against this backdrop, our products have strong momentum driven by compelling.
<unk> platforms, including 30, New Evo Tiger Lake designs for 13 of our Oems Tiger Lake has shipped more than 70 million units this year, making it our fastest ramping notebook ever.
We are raising the bar again with all their lake our first performance hybrid architecture product, which I am pleased to say began shipping in Q3.
Until seven and will start to launch next week at innovation, the Alder Lake family will offer customers significant advantages across a range of workloads, including gaming content creation in AI acceleration Alder lakeville scale from ultra mobile to desktop and we'll go to market across a range of segments form factors.
Three on power envelopes faster than any new architecture in Intel's history.
Turning to the data center, new and existing workloads continue to move to the cloud security and privacy requirements are driving enterprise deployments and the <unk> build out is powering networking I remain confident about the long term of the datacenter.
Despite regulatory changes in China, and short term ecosystem supply constraints impacting some customers.
Customers continue to choose Intel for the data center needs and our third Gen scalable Xeon processor ice lake have shipped over a million units since launching in April and we expect to ship over 1 million units again in Q4.
Center alone.
All of our Oems are currently shipping systems, and we expect all our major cloud customers have announced instances by the end of the year.
This includes Google as well as the AWS, who have already launched their highest performing xeon E. C. Two instances ever a tremendous milestone, resulting from our close collaborations.
For almost 15 years.
Looking ahead customers remain very excited by Sapphire Rapids, which we expect to have in production in Q1 Sapphire Rapids sets. The standard for next generation datacenter processors. It was recently selected by the U S Department of energy to power compute intensive modeling.
<unk> their stockpile stewardship program.
And a core and mobile networks and tell us powering the transformation to Virtualized cloud native deployments, 50% of new core network deployments are now running on off the shelf servers, and we expect that to increase to over 80% by 2024.
So for next generation transformation is the virtualization of the radio access network known as V brand, we're working with service providers globally to enable this transition, including Verizon racket and dish network and others today nearly all early commercial deployments are running on Z on in our flex ran software referenced.
The texture.
We see tremendous opportunity in DRAM and in Q3, we announced the collaboration with Juniper networks to accelerate future deployments.
Raul, we expect global Beaver in base station deployments to move from hundreds to hundreds of thousands and eventually millions with private five chi over the next several years.
Finally edge compute needs continue to grow and our Iot Chi business had an all time quarterly record in Q3.
In mobility the market for automotive silicon is expected to more than double to $115 billion by the end of the decade as <unk> begin to move from the garage to the streets.
Mobilized.
<unk> is helping to lead this change and we recently announced that we will begin to offering driverless Robo taxi service starting next year in collaboration with <unk>.
From PC to data center to the network to the edge Q3 was full of examples of the increasing need for semiconductors, and where customers continue to choose.
Oh.
Since my return, we've nominally laid out a roadmap for success, but more importantly, we've already started executing on what I like to say is a torrid pace back in March when we unveiled our powerful new IDM two point of the strategy I outlined our course for a new era of innovation at Intel.
And to committed to one expand our internal and external manufacturing to address unprecedented global demand for semiconductors to open our doors to be a world class foundry three regain process leadership for deliver leadership products in every category in which we compete.
We are driving.
Where I every area. So let me talk through each one starting with how we are expanding our manufacturing capacity and our foundry business.
Our factories are executing superbly and construction is on or ahead of schedule across all major sites last month, we broke ground on our two new Fabs in Arizona three months ahead of schedule.
Regress and band capacity, we're using a smart capital approach. So that we can adjust quickly to opportunities in the market and to gain share while managing our margin structure and capital spending there are three elements to smart capital first we are focused on aggressively building out shelves, which are the smaller portion of the overall cost of the fab.
As we explore this lead time, having available shelf space gives us flexibility in how and when we bring additional capacity online.
We will make effective use of external foundries leveraging some of their unique capabilities to ensure we are delivering leadership products.
We're already one of the largest foundry customers in this quarter.
Have all announced that key products, such as media Lake and pump to Vecchio will leverage third parties for some of their titles. Finally, we expect our plans to benefit from investments from governments, who understand that a healthy semiconductor industry is vital to their economic wellbeing and national security.
With bipartisan support in both.
Both houses we are hopeful the chips act will be passed by the end of this year, allowing us to accelerate decisions for our next U S site.
This will also enable a more level playing field with our competitors, who enjoy significant support from their governments.
We've also seen considerable interest in the EU with the European Chips Act and the process.
Assess to select our next site in Europe is proceeding rapidly.
Intel remains the only global company committed to building a leading edge foundry in the U S and Europe for customers around the world.
Together IBM to point, though with smart capital uniquely positions for an enormous and unique market opportunity including.
Country ambitions.
Iff's will enable intel to grow faster expand monetization of our process and packaging capabilities leverage our design IP is more broadly and provide sustainable superior cash flows from our assets.
Since March we have shipped our first iff's packaging units for revenue engaged.
Our final well over 100 potential customers, including several large customers who are working with us on our leading edge Intel <unk> and we have multiple customers planning test chips on until 16 that will be in our factories early next year.
We also had a significant win with the U S government, which selected Intel to provide commercial.
Age with services in the first ramp of its ramp C program. We are proud of this achievement and the confidence the U S government has enough to deliver them a trusted foundry capability.
In July at our Intel accelerated event the team and I shared the most detailed roadmap we've ever provided for process and packaging.
Found technologies, a roadmap that brings us the performance parity in 'twenty, four and clear leadership in 'twenty five.
I am happy to share that Intel seven until four until three until 'twenty, a an Intel <unk> are all on or ahead of the timelines we set out in July four.
For example on itself.
We said, we have taped out our compute tile for meteor like in this quarter. It came out of the fab and powered up and within 30 minutes with outstanding performance right, where we expected it to be all told this is one of the best lead products startups, we have seen in recent memory, which speaks to the health of the process. In fact, we are using a.
Pre production release have been tough for and our newest neuromorphic computing chip Louis he too.
Finally on the product front, we are intent on delivering leadership products in every category in which we compete in August at our architecture day, we started delivering on that promises we made five major architecture.
For our most dramatic updates in the last decade, we introduced hybrid computing with two new generations of X 86 cores, enabling power efficient designs that our performance for the most demanding workflows, we unveiled our Intel arc brand for discrete graphics, starting with our ALCHEMIST product, which will be on shelf in Q.
Announcement of next year, we continued our central role in the evolving data center landscape with Mountain Evans, our first AC based infrastructure processing unit or ICU developed in close collaboration with a major cloud provider, our IP use enables superior security capabilities and let out.
Q1 cloud customers move infrastructure task off the CPU, thereby allowing them to rent 100% of the CPU capacity to their customers.
We also gave additional detail and Sapphire rapids, and it's compelling AI and accelerate our capabilities and last but not least we opened the curtain on pumps.
Our goal with our highest ever compute density the 100 billion transistor device delivers industry, leading flops to accelerate AI H P C and advanced analytic workloads.
Early parts of SQL Silicon is already demonstrating leadership performance setting an industry record and both inference and training throughput.
<unk> on popular AI benchmarks next.
Next week at our Intel innovation event, we will take the next step forward with a renewed commitment to developers and a host of new tools technology and product announcements announcements that really underscore how we are rapidly bringing the geek back.
As I have said we are repositioning.
Putting the company for long term growth and we are analyzing the investment plans required to achieve our goals and provide attractive long term results for our shareholders. It is abundantly clear to us that we must invest in our future right now to accelerate past the rest of the industry and regain unquestioned leadership.
Positioned to do.
Our investment plan is aligned with our <unk> strategy to rapidly build our manufacturing capacity in response to the expanding market grow our share and to accelerate innovation, enabling Intel to leap ahead, with new businesses and capabilities in the future.
The recent reorganization around.
And what businesses along with the new leadership, we have added is already having an impact however, our CFO George Davis recently advised us that he has decided to retire in the first half of next year. We are very grateful to George for his dedicated surface and the leadership with the company and he will be working with us for a smooth transition.
These were currently engaged in a search for Georgia successor, and he is helping us with the process.
Naturally want to give his successor and opportunity to participate and optimizing our long range plan and we would not want to hold a critical investor day without the new CFO being in place as such we have decided to move our event to February.
<unk> 17th of next year. This has the added benefit of hopefully being a more in person event, while giving us a better view of the government investments from which we expect to benefit.
We have made this decision for very practical reasons of George's retirement. The company is running well we are confident in our process technology and product Roadmaps.
Curious our business is healthy in our markets remained strong and above all we are executing on our plan giving.
Given the new timing of our Investor day, I do want to take this opportunity to paint the general picture of what our plan looks like and George will share a few more details in a few minutes.
We have a huge opportunity with new businesses.
Maps ethics networking foundry and mobility, all large and growing segments. When combined with the continued expansion of our current client and data center markets, we cannot and will not Miss this opportunity.
First thing now will enable us to reposition the company to deliver double digit revenue.
Revenue growth as these investments pay off.
While these investments will pressure free cash flow in the short term our operating cash flow will remain strong reflecting the high quality of our business and we remain committed to a healthy and growing dividend.
As with free cash flow, our gross margins will be below currently.
And grades for the next two to three years before recovering but will remain comfortably above 50% as we continue to exercise financial Prudence we.
We have the utmost confidence that our investment plans will ensure the company's long term success and deliver attractive returns for our shareholders I look forward to sharing the details.
Current love a few in Q1 and I am confident you will agree.
Before I turn it over to George let me finish by saying that when I came to the company I have three goals for the year creates a strategy built the team and rebuild the culture and execution machine. We are only eight months into the journey, but we have already achieved a lot.
<unk>.
We now have a clear strategy, we've built the team by bringing in new leadership and adding over 6000, new engineers to bolster our incredibly talented team we've reorganized our business units to focus on our key markets and starting next year, we expect to begin breaking out our results to more closely align with these changes.
And to drive increased the visibility and accountability.
And finally as I outlined today momentum is building as we drive a path to our roots of execution and innovation.
The entire Intel team understands the work we have ahead of us, but we remain confident about our future we have the right strategy.
Strategy the right team and we are motivated to win I remain convinced that our best days are still ahead with that let me turn it over to George.
Thanks, Pat and good afternoon, everyone. We delivered solid results with revenue up 5% and gross margin up 130 basis points year over year.
Strong demand in our D. C G in I O T G businesses, despite the highly constrained industry wide supply environment.
Q3 revenue was $18 $1 billion slightly below our guide due to shipping and supply constraints that impacted our businesses demand remained strong in our PC business.
With particular strength in commercial desktop and higher end consumer notebooks offset by inventory digestion and lower end consumer and education segments gross margin for the quarter was 57, 8% exceeding guide by 280 basis points, primarily due to an increase.
This mix of desktop and premium notebook products Q.
Q3, EPS was $1.71 up 61 cents versus guide.
47 cents of this beat is predominantly due to a mcafee related special dividend associated with the divestiture of their enterprise business and a one.
Income tax benefit.
We had a strong operating <unk> of approximately <unk> 14 per share as well largely driven by demand for higher end products and client and lower operating expenses relative to guide.
In Q3, we generated $9 $9 billion of cash from operations.
Time, 10 free cash flow of $5 $9 billion and paid dividends of $1.4 billion.
Moving to segment performance in the quarter.
CCG revenue was $9 $7 billion down 2% year over year on a challenging compare and continued industry wide.
Component shortages that are restricting lower end system sales.
Note that when excluding the impact of ramping down our Apple CPU and modem businesses.
CCG revenue is up approximately 10% year over year.
This highlights the strong execution in underlying demand in our.
Client business.
Platform Asp's in client were up 9% year over year, and 16% sequentially on increased desktop volume and a richer mix of premium notebook products.
Operating income was $3 3 billion down $237 million year over year.
Primarily due to increased investments in our technology and product roadmap.
D C. G revenue was $6 $5 billion up 10% year over year on continued recovery in our enterprise and government segment and isolate ramp. These results were slightly below expectations due.
Who industrywide component supply constraints that primarily impacted our enterprise customers and areas of softness in PRC, including cloud as customers adapt to new regulations.
Platform Asps were up 3% year over year on improved mix, driven primarily by increased enterprise and.
Due to the volume.
Operating income was $2 $1 billion up 8% year over year on higher revenue, partially offset by increased investments in our technology and product roadmap.
I O T. G achieved all time record quarterly revenue of $1 billion up 50.
Government that year over year on a broad based recovery from Covid, driven lows with particular strength in the industrial and retail segments.
Operating margin was $276 million up 352% year over year, returning to pre COVID-19 levels of profitability.
For PSG revenue was $478 million up 16% year over year demand continues to significantly exceed supply impacting Q3 results and Q4 forecast off.
Operating margin was $76 million up 90% year over year.
Mobile AD revenue was.
$326 million up 39% year over year and achieved an all time Q3 record.
Operating margin was $105 billion up 123% year over year.
Like continues to execute well, winning key designs and rapidly growing revenue and profits.
Moving to our Q4 outlook.
We are forecasting $18 $3 billion in revenue up $200 million quarter over quarter with D. C. G seeing modest more modest growth than previously expected as China demand and supply challenges persist.
C C. G is expected to be relatively.
But over a quarter.
Wrong demand for our higher end products bolstered by the launch of Alder Lake are being offset by weaker OEM demand for lower end products as they prioritize their limited component supply to support higher end system sales.
We see our edge businesses continuing to recover year over.
That caught on Covid related impacts.
Gross margin is expected to be approximately 53, 5% unchanged from prior expectation and continues to include the impact of a one time charge related to our Intel federal business. Excluding this charge gross margin would be approximately.
For year, 55% down three points quarter over quarter on new product ramps and factory start up charges.
We're forecasting EPS of <unk> 90 per share and a tax rate of 13%.
We had previously expected 13th of the Q3 I cap gain to have occurred in Q4.
Leif.
Which accounts for the change from prior Q4 expectations.
Turning to our full year outlook, we're holding revenue guidance at $73 $5 billion with gross margin up modestly to 57% and EPS of $5 and 28 <unk> up.
48 cents from our prior guide.
Consistent with the investment mode. We are in under IBM 2.0, we expect capex of $18 billion to $19 billion and free cash flow of approximately 12, and a half billion dollars up $1 $5 billion versus prior guidance.
And our C C.
Core business, we expect full year revenue to be approximately flat year over year as growth from an increasing Tam is offset by the ramp down of our Apple modem and CPU revenue.
And the exit of our home Gateway business.
Adjusting for all of the Apple and home Gateway business CCG would've been up approximately 9% year.
Jim here.
For D. C. G. We expect full year revenue to be down low to mid single digits year over year due to a more competitive environment consistent with our expectations.
Lower demand from China.
And industry wide component supply constraints.
Before moving.
Year over some comments on our longer term performance I want to briefly cover changes to our non-GAAP reporting beginning in 2022 to more closely align with our semiconductor peers.
First we will be removing stock based compensation from our operating segment and non-GAAP results.
Secondly, we will exclude all gains and losses from our I cat portfolio.
Change that allows better comparability between periods by eliminating large variations in performance as we saw this quarter.
We also expect to align our segment reporting with our announced new business unit configuration.
We will have more details on what to expect here next quarter.
Moving to long term financial guidance as.
As Pat mentioned with the movement of Investor Day to Q1, we want to provide some insights into the early years of our plan first our revenue outlook reflects fundamentally strong town.
<unk> across our operating businesses with growth driven by our leadership products, we see revenue in 2022 of at least $74 billion despite ongoing supply constraints.
As supply normalizes, and our investments at capacity and drive leadership products into the.
Tam place, we expect to see our revenue growth accelerate to a 10% to 12% CAGR over the next four to five years.
For gross margin with the impact of our investment in capacity and the acceleration of our process technology, We expect gross margins between 51 and 50.
53% over the next two to three years before moving upward.
We are in a time of accelerated investment and capital process note acceleration in R&D as.
As the foundation for changing the trajectory of the past few years.
In alignment with our.
The Mark of 2.0 strategy, we were forecasting 2022, Capex of 25 billion to $28 billion with.
<unk> for further growth in subsequent years.
We believe our investments position the company for very attractive long term returns.
Before I hand off to Q&A.
As Pat mentioned I plan to retire from Intel in May next year.
Been a public company CFO now for 15 years and it is time for me to spend more time with family and friends as part of the next chapter in my life.
It has been a true privilege and frankly quite exciting to work with Pat and the.
Q&A a team on the launch of IDM to point out.
And I look forward to following our transformation over the next several years.
There is no company like Intel.
And the immense talent here serves as a wonderful foundation for the transformation ahead.
With that let me turn it back over to Tony.
Our leadership get to your questions Alright.
Alright, Thank you George moving on now to the Q&A as is our normal practice, we would ask each participant to ask just one question.
Operator, Please go ahead and introduce the first caller.
Our first question comes from the line of Joseph Moore of Morgan Stanley. Your line is.
Any.
Great. Thank you I Wonder if you could talk about the gross margins next year.
What what is the you talked about investment in 10 nanometer, but you took those ramps. This year is it the sort of simultaneous ramp of 10, and then startup cost of seven that pulls that down and why wouldn't you recover from.
Oh, absolutely years as you mature.
Deals thereafter.
And I also wanted to ask just as a follow up does that does the accounting change with the numbers have been lower if not for the the change to take stock compensation out of the numbers.
Let me, let me start with the margin question and then I'll ask George to step in and help you on the first.
That and say you know this is a pivot point for the company. We are repositioning itself for growth to be a long term growth company. We see the massive opportunity that we have a near term we could have chosen a more conservative route with modestly better financials, but instead.
The board the management team and this is why it came.
Came back to the company choosing to invest to maximize the long range business that we have you know overall these are great markets that we're gonna be leaning into with very unique positions that we have with our technologies and products. As you look specifically to next year's margins here, we see that the decline is driven really by two factors.
You know what is the new manufacturing nodes and as you've heard US say you know we're going to rapidly move through our five nodes in four years and this will have a pressure on the margins near term as we ramp those up but will quickly on an accelerated pace, you'll give us leadership capabilities that will improve margins over the horizon.
We're also investing in our future and these investments that we're making now in our roadmap will pay off as those products returned to leadership leadership products to get leadership pricing, which begets leadership our margins. So as we said in our prepared remarks comfortably above 50% and we're confident in the multi year recovery.
We have the margins that result from.
Again competitive process competitive products will produce great results for us long term. So overall a couple of years of pressure returning over that horizon as we see these growth areas in our data center or a client business in these four new growth markets the networking.
Graphics mobility autonomy foundry and we've made a strong choice, we're gonna be decisive and were very transparent alright and ups.
Up front, we're laying out an understanding of where we're going and we elected to give that guidance earlier than we might have otherwise not just for next year, but over the horizon as well. So now is the time and were.
Making that decision boldly and aggressively Georgia will help in the last part of the question Yeah happy to Hey, Joe.
The.
We're announcing the accounting change in 2022, just to give people a heads up it's we think it's a pretty modest impact on gross margin. So it it works within.
Within the range that we've given for the next couple of years, obviously, we guided.
The next two to three years, not a 2022 and so.
Pat did a good job of laying out what are the key drivers there and.
The changes that we're doing on the accounting side are really were out of alignment with the industry.
On stock based comp and we're also I think like you probably.
No. We just assume not see these large adjustments in a quarter that our four cap related activities and so we're taking that out of.
Non-GAAP as well.
Quite frankly it.
With those two combined it was a net accretive.
With those two together over the last couple of years, but we think it's the time to make these changes and we think it's consistent with what the industry has done and the other factor that we did talk about is also starting to give accountable units against their new business unit structures, as well, which will give increase.
<unk> transparency to the marketplace and we'll also give increased accountability internally to drive the execution that we're laying out so without Tony next question.
Our next.
Western comes from the line of Ross Seymore of Deutsche Bank. Your line is open.
Hi, guys. Thanks for letting me ask a question.
And George Congratulations on your retirement, it's kind of a similar question on the longer term side of things Pat If I look back over the last decade, Intel's grown double digits I think once.
In a single year, so talk a little bit about what gives you the confidence in the company being able to be a double digit grower.
A couple of years out from now.
Well. Thank you and you know as we look at these markets here, we see a clear.
Clearly the client business with the CCG, we don't expect that to be a double digit grower, we do expect growth coming from the client business.
The IDC now is agreeing with us on growth next year, we do see the opera.
But for us to be a share gainer as well as gaining more of the bill of materials of the clients as well, but our expectations. There are modest in the growth of the client business clearly the data center business, we do expect to see stronger growth and as our products get stronger and as we've noted with Sapphire Rapids next year in.
The roadmap over 'twenty, three 'twenty, four and 'twenty five we do see yourself in a position that we'll be gaining leadership, which allows us to have pricing margin improvements in that product line and data center is growing but it isn't just the data center. It's also at least for new business areas that we've laid out and next the data center the networking.
<unk> business, we have a very strong position already but also the ability to reach into the network and the large growth that we see in the edge, where Intel is very uniquely positioned in the edge market as the <unk> becomes an open ran platform also the edge deployments.
<unk> smart factories smart cities, we are very well positioned and we expect to see substantial growth there.
In the graphics area, we have a good business today and the integrated graphics, but the opportunity for us to reach into this large and rapidly growing GPU business discrete graphics business high performance.
Performance computing, we're extraordinarily well positioned to be able to satisfy what we see almost is insatiable demand.
That area and then of course, the mobility business were already well underway with our mobile ly business very unique technology position another great quarter from that team and then finally.
You know the great synergies, we get from leveraging our core manufacturing assets as well as our process technology innovations and as we noted in the formal comments over half of the technology industry is going to be leading edge rate in the second half of this decade very few companies can do that and we're finding great interest for foundry.
<unk> business to be able to satisfy those so if you think about the growth in the core business plus these major new business areas and we've done a lot of modeling.
This and really built a very robust plan to go execute it we feel very confidence in the double digit CAGR that we described we're excited about it the teams are leaning into it.
Other than that our customers were excited about it and with that customer enthusiasm I'm very confident in what we've described here we are leaning in now's the time to make it happen and we're making the investments to realize that today.
Thanks, Matt.
Yes.
Yeah.
Thank.
Our next question comes from John Pitzer of Credit Suisse. Your line is open.
Yeah. Congratulations guys. Thanks, So let me ask the question I'll, let go of losses comments from George Congratulations on the retirement.
I wanted to dig a little bit deeper into the long term growth rate question that Ross just asked specifically towards the foundry business I'm kind of curious.
And even if you think about the gross margin guidance next year and the long term CAGR of 10% to 12%, what's the impact of foundry I'm, assuming you're still going to be relatively small next year in the business, but I'm just trying to get a sense as foundry grows how big of a contributor is it to that 10% to 12% long term CAGR and how do we think about the margin profile there.
As it unfolds.
Yeah. Thank you great question, John and there's a first would be that the revenue impacts in the investment impacts of foundry are fairly modest in the next couple of years.
They don't add that much to the top line. They don't detract that much from the bottom line is were really building that business now.
It's really in the later years, where you're going to start to see the revenue impact really start to matter. You know this is very typical of the foundry business takes a couple of years for a customer to pick a foundry move a design start to ramp it into the industry. So really has minimal impact for the next couple of years and then it will start to really deliver in years, four and five and then.
The second half of the decade more significantly.
With respect to margin, we expect that we are in our foundry business, having very similar margin structures to the leader in this business today.
And we see that as a good business, maybe a little bit lower margin than our best product margins today, but still would allow us to comfortably.
<unk> be above 50% as I said in the long term guidance that we laid out this is a great market for us to be reaching into it allows us to leverage the R&D investments that we have in process technology to more markets. Many of our AFP blocks as we open up the X 86 architecture for increasing innovation.
If we get to leverage enormous amounts of R&D for new monetization opportunities. You'll also we're leveraging our smart capital strategy, where we build shelves.
We start that process early that allows us to get those investments in the ground to start building some of that iff's capacity, but it also allows.
Capacity for increased market share gains and leveraging the balance between our internal and our foundry customers as well and to leverage government investments, we expect will be driven substantially to benefit the ISS business. So when we take all of that together unique technology position more flex.
<unk> and leverage capital positions unique IP benefits that we bring to it we're seeing great interest from our foundry customers already and we're seeing that on mature nodes like our Intel 16, but very much from some of our largest customers in the industry with our leading edge technologies, where we're getting a lot of excitement to be.
How's us best transistors that are available on the planet with the manufacturing capacity that we can bring we see this as a great complement to our business and so far things are going even better than I would've thought when I announced this business early in the year.
Helpful. Thanks, guys.
Thanks, John.
Thank you. Our next question comes from Stacy.
The skin.
<unk> research. Please go ahead.
Hey, guys. Thanks for taking my questions I wanted to ask a question on the current quarter results.
Typically datacenter asps, so cloud was down 20% year over year enterprise.
Enterprise was up 70% year over year and yet your asps were down.
<unk> were.
It went down pretty materially sequentially like how do I reconcile that given the mix there, especially with the isolate ramping everything should have gotten much better at what happened with datacenter Isps in quota.
A couple of things Stacy.
First the mix of products in the quarter were more weighted towards what.
I would call our HCC products down from.
From a fee standpoint from our FCC and and that part of that is coming out of the lower cloud than we expected.
I would say the other piece is.
We we saw it.
Bounce up in our network.
Season, as you know those have a much lower asps.
And tend to be dilutive to a S. P. A.
And that that was relative to Q2.
The enterprise was up 70% like shouldn't mix have gotten much better like what impact was competition or anything else here. It seems like there has to be something else going on and can't just be niche.
Yeah.
One is the SFC the enterprise piece is.
As I said is a mix of products that we saw it was skewed down from our ex U C.
In the quarter with with the enterprise as well, but the asp's of any individual product line, we're still very in.
Aligned with our normal what you'll asp's for those individual products facing so overall, we just say it was a mixed discussion this quarter. It wasn't today S. P discussion at that level, even though right you average those together you get different effects also as we said for the data center business. We did have some unique issues in China this quarter, which led.
Any different behavior in that business some of the regulatory issues. There. So overall you know not where we would have expected the data center to be for the quarter, but still a very strong performance and we're happy with the growth that we're seeing in that business and as we've indicated.
The momentum of ice Lake is growing you know sapphire.
Our rapids, great interest in that product. So we're seeing that the overall competitiveness in the growth of that business area is looking very good for us for the future. We're excited about it and everything is going as we would have hoped for that business.
Are those China regulatory issues permanent.
Yeah.
You might've seen theres been some.
Regulatory questions around gaming in China, right and all of the cloud vendors are adjusting their offerings to meet that new regulatory environment. So we expect that a quarter or two for them to digest, what they would look like we do expect that market to recover going forward and as you're probably aware, we have uniquely high market share.
And the Chinese cloud market. So as it recovers, we expect a nice recovery in that business area for us and we expect that there will be a return to normalcy next year in that area of our business and just for added clarity, where we expect it to continue in Q4 yeah.
Yeah.
Next question.
Our next question comes from Tim.
Carey of UBS Your line is open.
Thanks, a lot George I wanted to ask you about gross margin puts and takes more over the longer term. So you are saying 51 to 53 over the next couple of years, and then kind of moving higher after the next few years, but at the same time Capex is also going to 25% to 28 next year in it.
Do you think it might be higher than that and the depreciation is still only 11 billion right. Now so that's going to obviously go up a lot too. So I think that the obvious question is going to be how believable. It is that gross margin can ultimately come back given that.
Would think that depreciation is going to really be ramping in those out years. So can you just sort of hold.
Sam there in terms of how believable at is that gross margin can come back when there's just such a gap between depreciation and capex.
Yeah for sure first off I think a.
Part of the reason for spending this amount of Capex is to catch up with the capacity shortfalls that we've had and also to build in more flexibility.
Hold on these things are all support higher revenue over time.
Which helps absorb as you know some of the depreciation.
Being said it will be growing no question, our depreciation impact will be growing over the next couple of years.
You know the the impact of costs, which is the all the.
The investment that is going on outside of depreciation in the note acceleration the pad has been talking to.
That has a big impact.
Particularly over the next few years.
Cuz or the number of nodes that are being worked in parallel so.
So we think that gets better coming.
<unk> this period.
And you know we've had a pretty reasonable assumption inside of our gross margin estimates for how.
How much unit costs were going up and then how much of that you can recover in asps. So there's no there's no big.
Big a missing element I think it's we.
Coming out of two as we've said we expect to grow in.
Two our investment and we expect the investment in node compression.
It takes less of a toll as we come out of this period and ultimately, we're making those investments and node compression to get more competitive products and more capabilities and as the products get more competitive better pricing better margins.
Which enable us to have not only better gross margins, but obviously it will have a flow through benefits into cash flows is where you'll are impacting our capex investments. So all of these things start to generate positively as we get back on top of our competitive position and as we said we've had an extraordinary.
Expect since we last met every one of our process nodes that we described some said when we describe five nodes in four years. You know you have never been done in our history, and we said that's right and we're going to do it and that's why I updated in the formal comments all of those nodes until seven until four until three until 'twenty a.
CT 18 E on or ahead of schedule relatively speaking, we're closing the gap on the industry, probably even more rapidly than I would've expected just a quarter ago and as a result of that you know these investments will be producing superior products with superior pricing and margins more rapidly than we would have forecast even a quarter.
And so overall, we think all of these things are now starting to play together, obviously what happened a couple of years to work for but this is going to be a great outcome and we think all of our aggressive lehman's right now we're gonna be handsomely rewarded in the marketplace to our customers and to our shareholders over time.
Thank you Pat.
Thank you. Our next question comes from C. J Muse of Evercore ISI. Your line is open.
Yeah. Good afternoon. Thanks for taking the question I guess a question on Capex, So you've outlined a higher a higher number for calendar 'twenty, two but as I think about and contemplate higher intensity at the bleeding edge nodes it would appear that that.
That would really be for Intel only so.
Should we be thinking about a step up above and beyond that level as you build out capacity for Iff's overtime and then a second quick question around that are you, making any changes to how you're accounting for depreciation lifestyle on equipment or buildings or anything like that as part of the accounting.
Any changes that you've outlined tonight. Thank you.
Yeah. So the initial Capex abuse go obviously as we've said you know building out shell capacity building flexibility into it as Georgia indicated hero in subsequent years might be going up a bit more but as we've also said, we do expect to see the opportunity for.
For government investments to enable us to go bigger and faster on our Capex investments. So the numbers that we've given reflect the initial build out of our foundry business. So we feel comfortable in that and we've also described bar smart capital strategy that gives us more flexibility for what we do internally what we.
We do on our foundries or the ability to benefit from government of estimates the flexible buildout of shelves, but overall, we see these investments allow us to grow and grow share gain.
Gain foundry customers, where as those get committed right bill.
Build out the specific capacity and then balancing a foundry.
<unk>, which enables us to leverage industry capacity as well as our own and everything we bring internally we have better margins associated with it. So overall, we think it's a very uniquely powerful resilient and favorable strategy for us to execute over time.
Yeah and C J, the accounting changes that we're talking about.
Number one are to increase transparency into the business by.
Breaking out the segments the way Pat has been describing.
The segments of the markets that we're gonna be addressing.
The other changes are really just a tool.
To align with the industry. So when people look at are not.
Non-GAAP numbers.
They're going to see the same basis for that as is most of our peers.
So no accounting changes that we're talking about that relate to how we treat our depreciation of assets.
Next question.
Thank you. Our next question comes from Blayne Curtis of Barclays. Please go ahead.
Hey, good afternoon. Thanks. So my question just two on gross margin one just near term the federal impact in Q4, you just remind us if that continues through the first half and then youre starting at 55, when they were getting long term kind of 51 to 53.
It seems pretty clear as you ramp more Intel seven product the margin has been going down substantially. So I'm just trying to think about I know you probably don't want to guide next year, but.
You're out within that reads are you going to be closer to the bottom of it as you ramp more of the client across the majority of Q4, and then you obviously have servers on the way as well just trying to understand the impact.
Back in the near term here on gross margin and then kind of just long term as well it does seem like listen to your comments Pat that it does require that double digit top line. So just want to understand you.
I think a lot of people may think the CAGR is maybe half that on this call. So just kind of trying to understand how quickly you could be.
As it relates to the gross margin line, but you're spending with the smart capital plan. Thanks.
Yeah look on.
On our Q4 gross margin is pretty much the way we thought when we talked about it last quarter. When we were guiding for the rest of the year are the Intel federal impact as a one quarter impact.
And so it does not carry forward.
So you know.
The to the extent that you want to think about a 22 gross margin I think again, our 51 to 53 for the next two to three years and really the biggest hitters being.
The impact of higher capital, which you see accelerating in Q4 this year going into next year and then the effect of.
Multiple node compression.
Those those are the key dynamics that we see them.
So that's all we can guide at this point yes.
For all the tricks that we feel confident in these numbers were giving a lot more transparency, we're taking the opportunity to give you more understanding of our business. We're electing to do that earlier in the process than we might otherwise because we're making these decisions were choosing to give you a lot more understanding of the business. We're confident in these growth outlooks as well.
These are exciting new market categories, right that we're leaning into their large market categories and it's not just that they're large categories. They reinforce each other the stronger I am in networking the stronger I am in datacenter the stronger I am in client the stronger I am in graphics or the stronger I am on my process technology, the stronger I am.
You know the degree of business every one of these is building on each other and creating synergy value and overall right as we move to leadership in these areas and we are well on track on doing that we feel quite confident in the growth rate you know the margin profile. It will of course take the opportunity at our analyst day to dig into the business areas quite a bit.
My family, we're going to help you understand those we're going to give you a segment reporting that helps you see those and be able to get transparency and accountability through it.
But overall, we believe we are laying out a pretty exciting path that the management team board of directors and our customers are really leaning back into us to say, yes. This is Intel we're excited for the future.
More hours the time.
Thanks.
Next question.
Our next question comes from Pierre <unk> of New Street Research. Please go ahead.
Thanks for taking my question and Joe.
Youll makes it makes type I wonder what's your life.
Like Nick I'm sorry.
Nice things about the gross margin.
We have.
And so.
And so maybe you know I'm going to ask you. Another question on gross margin, but they won't just to make sure I give you a bit.
Sure.
I was actually wondering I just want to say to your question is just for you Joe.
Okay.
About.
You haven't talked about.
Market share is of those transitions. So next two three years located in gross margin.
Maybe stepped down you're going to invest in that.
How do you see your market share evolving and why.
And then I compare to releasing that to gross margin.
<unk> gross margin guide Israeli minimums of taking prices down to protect gross margin during their transition.
Driven by investments.
Overall, we expect that you will be in a position to gain market share in our existing markets as we're making these capital investments.
We have been woefully short of capacity for a number of years here Theres just great opportunity in the industry and as you know.
As everybody in every industry anywhere in the World realizes semiconductors are hot we need more of these so we're building the capacity to satisfy that go in the near term capacity as destiny building more.
Capacity enables us to gain more market share and we think we can do that as our products get stronger with very favorable pricing.
Additional as well and you know for instance in the client business Alder Lake Heroes in production it will be talking more about that next week, a tremendous product that will be a great market.
Market share gainer, as well as a pricing leader right as well as structured across the segments that allow us to gain share across multiple segments of the client marketplace also I'd point out that these four areas. These four new growth businesses, we're very small in those businesses. Today. These are massive growth potential.
For us large favorable markets that are looking for leadership logic capabilities that your intelligence uniquely positioned to supply into the industry and overall you know clearly the near term as we've laid out with great transparency you know some of the margin impacts in the near term, but these are great.
Investments great investments in large growing favorable markets that very few companies have even the opportunity to participate in and we bring such massive assets to them that we believe that we're going to be well positioned to gain leadership positions across networking accelerated computing and graphics in the autonomous vehicle.
Category in the foundry business and you combine that with share gaining positions in client and data center. This is a tremendous period of time, we're seizing the opportunity carpe-diem.
Thanks, Patrick.
Very good last question.
Last question comes from it.
Okay, Matt Ramsay of Cowen Your line is open.
Thank you very much guys good afternoon.
I wanted to ask.
Couple of questions on the data center business, one on product and one on the results.
On the product I think you guys reiterated that sapphire would be.
Shipping in Q1.
Todd I Wonder if you might give some commentary on when you expect to see some legit volume ramps of Sapphire and have that timing moves.
The second part of the question is on the results. It looks like the cloud segment was down 20% year over year off of a plus 15 last year.
So I don't know by my math, where we're down say mid to high singles from Q3 cloud levels two years ago pre Covid and Capex has been pretty strong sense. So you guys called out China, but theres. Some other things going on with market share maybe you could address those and talk about how we reverse some of that share loss. Thanks.
Sapphire Rapids with six.
Actually what we said back in June of this year, that's Oh, it's going to be in production in Q1 ramp in Q2, So no change and it's a timing we're working through the latter stages of the production process with.
With the design.
Yeah.
All of the elements of it so it worked out as we're ready to begin.
Volume ramp in Q2 of next year and on track for a Q1 launch with respect to the datacenter cloud business and our Q3 and we'll see some of this in Q4 as well.
<unk> largely is exactly what we said unique exposure to China, where we have a uniquely high market share you know nothing else significant going on in that business that really is the story overall the server business is constrained by supply right and this would be things like Ethernet controllers and power supply devices.
<unk> is that are holding us back from achieving and trust me, we would be shifting a lot more units right. If we weren't constrained by the supply chain of these other components in the industry our customers both cloud customers and Oems very strong backlogs that there are pressing us aggressively to satisfy.
But really limited by vs match sets as we call it in the industry. So other than those two factors China match sets everything else is going as expected for the data center business.
So maybe then let me just wrap up our call today by saying Oh I am so proud of the.
I'll, let Ted committed team here at Intel Despite all of the challenges of working through the supply constraints our teams our factories our product designers. The software developers are performing so well the execution machine that we have is restoring our very rapidly and a deep sense.
So desire that we can and we will win I also wanted to take the chance to personally. Thank George for his leadership all the things that he's done for our company and just his commitment to seeing through a smooth transition to his successor, we've taken the first steps of our journey and I can't wait to share more of our successes.
<unk> in the future thanks for joining us today.
Alright. Thank you Pat Thank you all for joining US today, operator could you please close the call.
Sir This concludes today's conference call. Thank you for participating you may now disconnect.
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